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Trading, Underwriting to Mar Morgan Stanley (MS) Q1 Earnings

Morgan Stanley’s MS first-quarter 2019 results, slated on Apr 17, are not likely to get much support from trading activities. Thus, trading income, one of the major revenue components, is expected to have an adverse impact on the company’s earnings.

After an impressive 2018 performance driven by significant volatility and higher volumes, client activity slowed down in the first quarter. During the quarter, several concerns, including a few lingering ones from the prior quarters like uncertainty related to Brexit and U.S.-China trade war, and expectations of global economic slowdown continued. However, these were not enough to result in a substantial increase in client activity and volumes.

Further, during a conference call, management projected a dismal trading picture. The company expects markets revenues to fall roughly 15% against an unusually strong quarter a year ago.

The Zacks Consensus Estimate for equity trading revenues of $2.49 billion reflects a fall of 2.5% from the prior-year quarter. Also, the consensus estimate for fixed income trading revenues of $1.75 billion indicates a decline of 6.5%.

Therefore, first-quarter trading revenues are expected to be $3.93 billion, down 10.7% year over year.

Here are the other factors that are expected to impact Morgan Stanley’s first-quarter results:

Fall in underwriting fees: Prolonged government shutdown at the beginning of the quarter and fears of economic slowdown weighed on companies’ plans to raise capital by issuing shares. Thus, Morgan Stanley’s equity underwriting fees are expected to be soft. The Zacks Consensus Estimate for equity underwriting fees of $421 million is on par with the prior-year quarter level.

Further, higher interest rates are likely to have slowed down companies’ involvement in debt issuance activities. Nonetheless, the Fed’s dovish stance on future rate hikes must have led to a slight increase in debt issuances during the quarter. Nonetheless, the consensus estimate for debt underwriting fees of $479 million reflects a year-over-year decrease of 7.5%.

As debt origination fees account for more than 50% of total underwriting fees for Morgan Stanley, this will likely have an adverse impact on overall underwriting fees. All in all, total underwriting fees are projected to witness a 4.2% fall year over year as the consensus estimate for the to-be-reported quarter is $900 million.

Modest rise in net interest income (NII): Higher interest rates will likely lead to a rise in interest income. Also, overall loan demand was decent — particularly in the areas of commercial and industrial. Hence, NII will likely witness a slight increase.

Advisory fees to show some strength: While dealmakers across the globe were active during the first quarter, global deal value and volume witnessed a fall due to higher borrowing costs and several geopolitical concerns. Likewise, given the government shutdown and geopolitical ambiguity, IPO activities slowed down despite decent equity market performance during the quarter. So, these factors will have an adverse impact on Morgan Stanley’s advisory fees.

Nonetheless, the strong M&A deal pipeline from the previous quarters will offer some support. Further, as the company is one of the leading players in this space, it will likely provide leverage to attract more business. The consensus estimate for advisory fees is $614 million, a jump of 7% from the prior-year quarter.

Reduced scope of cost containment: Expense reduction, which has long been the main strategy to remain profitable, is not expected to be a major support in the March-end quarter. But given the success of Morgan Stanley’s cost-saving efforts and other restructuring initiatives, overall operating expenses are likely to remain manageable.

Here is what our quantitative model predicts:

Chances of Morgan Stanley beating the Zacks Consensus Estimate are low this time as it doesn’t have the right combination of two main ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: The Earnings ESP for Morgan Stanley is +0.64%.

Zacks Rank: Morgan Stanley currently carries a Zacks Rank #5 (Strong Sell), which lowers the predictive power of ESP.

Morgan Stanley Price and EPS Surprise

Morgan Stanley Price and EPS Surprise | Morgan Stanley Quote

Notably, the Zacks Consensus Estimate for earnings of $1.17 reflects 19.3% decline on a year-over-year basis. Also, the consensus estimate for sales of $10 billion indicates a fall of 9.8%.

Stocks Worth a Look

Here are a few finance stocks worth considering as they have the right combination of elements to post an earnings beat this quarter.

The Bank of New York Mellon Corporation BK is scheduled to release results on Apr 17. The company, which carries a Zacks Rank of 3, has an Earnings ESP of +0.63%.

Northern Trust Corporation NTRS is scheduled to release results on Apr 23. It has an Earnings ESP of +0.57% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Earnings ESP for BankUnited, Inc. BKU is +1.89% and it carries a Zacks Rank of 3. The company is scheduled to report quarterly numbers on Apr 24.

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